Will I Lose All My Property If I File Bankruptcy?

It’s probably the greatest and most common fear of anyone considering personal bankruptcy.

The good news is that if you’re like the vast majority of people who file bankruptcy, you will probably get to keep all of your property. This is because bankruptcy law allows you to exempt (protect) certain types of property within certain limits.

In fact, 95% of all Chapter 7 bankruptcy cases are “no-asset” cases, meaning you will keep all of your property because it is all considered exempt, and therefore protected. And in Chapter 13 bankruptcy, you are allowed to keep all of your property, exempt and non-exempt. However, if you choose to hold on to non-exempt property (a baseball card collection worth $10,000, for example), the cost of doing so may be an increase in your monthly Chapter 13 plan payments.

The Bankruptcy Estate

So, how do you protect your property in bankruptcy? Before we can discuss how to protect your property, we have to talk about something called the bankruptcy “estate.” 

When you file bankruptcy, you are required by law to list all of your property and assets, without exception, along with their value on a form called Schedule A/B: Property. This includes all:

• real estate (such as a residence, building, or land)
• vehicles (cars, vans, trucks, tractors, sport utility vehicles, motorcycles, watercraft, aircraft, motorhomes, ATVs, etc.)
• personal and household items (such as furnishings, electronics, collectibles, sports equipment, firearms, clothes, and jewelry)
• financial assets (bank, stock, and retirement account balances, business interests, legal claims, tax returns, and other monetary interests)
• business-related property (any property associated with a business, such as a restaurant oven or merchandise)
• farm- and commercial fishing-related property, and
• any other assets you own.

Once your case gets filed, your property becomes what’s called the bankruptcy “estate.” In a Chapter 7 case, the bankruptcy trustee – the official responsible for overseeing your case – administers your bankruptcy estate during your case and, if you have any non-exempt property or assets, liquidates that property and distributes the proceeds to your creditors.

Because the purpose of bankruptcy is to provide debtors with a “fresh start,” bankruptcy law allows you to protect essential property like a home, working car, household furnishings, and clothing, as well as other types of property, by exempting (removing) them from the bankruptcy estate. And while there are limits on how much can be exempted, it turns out that for most people filing bankruptcy everything that they own is exempt.

Bankruptcy Exemptions: Legal Protections for Your Property

Bankruptcy exemptions are federal and state laws that determine if you can protect property like your house, car, or pension and retirement funds from creditors. In 31 states, individuals who file for bankruptcy relief are restricted to using their state exemption scheme. (NOTE, however, that individuals choosing state exemptions are also entitled to claim as exempt property that is exempt under other, non-bankruptcy law, including such things as certain tax-exempt retirement accounts, Social Security benefit, and veteran’s benefits.)

Currently, however, 19 states and the District of Columbia allow filers to choose between their state or the Bankruptcy Code exemptions . If your state allows you to choose, you must pick one exemption scheme or the other; in other words, you can’t choose to exempt some items using your state exemption scheme and some using the Bankruptcy Code exemption scheme.

The amount of an exemption is based on the equity in an asset, which is the value of the asset minus the amount of secured loans (such as real estate mortgages or vehicle liens). For example, if a person owns a vehicle worth $23,000.00, and owes the lender $18,000.00 on the loan taken out to purchase the vehicle, the person has equity of $5,000.00 in the vehicle. The amount the person could (and generally would) exempt is $5,000.00.

Bankruptcy Exemptions in Minnesota

Minnesota is one of the states that allows filers to choose either the Bankruptcy Code or the state bankruptcy exemption scheme. Which one you choose will depend on which is most advantageous based on the specific types of property you own. 

A few things to bear in mind that impact the value of exemptions:

• If a married couple files a joint bankruptcy, each spouse can use the full value of each exemption with the exception of the Minnesota homestead exemption.  
• A married couple filing a joint bankruptcy must choose the same exemption scheme (i.e., the Minnesota state OR the Bankruptcy Code exemption scheme). 

Protecting Your Home in Minnesota Bankruptcy

If you do not own a home, or you have less than $25,150 equity in your home, you will generally want to utilize the Bankruptcy Code exemptions, which includes a liberal “wildcard” exemption (of up to $13,900) that can be used to protect any property you like, including things like bank deposits and tax refunds that would not be exempt under the Minnesota exemptions.

However, if you own a home (and have more than about $25,000 in equity in the property) you will usually choose the Minnesota state exemption scheme – among the most generous in the country – which allows you to exempt up to $450,000 of the equity you have in your home.

Protecting Your Car in Minnesota Bankruptcy

Under the Minnesota exemption scheme, you can protect up to $5,000 of equity in one motor vehicle. If the vehicle has been modified at the cost of at least $3,750 to accommodate a disabled person, you can exempt up to $50,000 in the vehicle.

If you choose the Bankruptcy Code scheme, you can apply $4,000 PLUS apply any unused portion of the wildcard exemption (up to $13,900) to protect the equity in your vehicle. In other words, under the Bankruptcy Code, you could potentially protect up to $17,900 of equity in your vehicle.

Bear in mind that filing bankruptcy does not generally wipe out liens. Therefore, if you want to keep a home or vehicle that is collateral for a loan, you need to keep your payments current. If your payments are current and there’s no equity (or you can exempt the equity), you can rest assured you will be able to keep these items so long as you continue to make the scheduled payments.

While every bankruptcy case is unique, there’s a good chance that you will be able to keep all the property you own because it can be exempted under bankruptcy law.

Even in cases that include non-exempt property, some thoughtful pre-bankruptcy planning with a qualified bankruptcy attorney can often help you avoid surrendering that property.

If you’re considering bankruptcy, it’s always important to consult with an experienced bankruptcy attorney who can help you to maximize your property exemptions.